WEAKNESSES

Regional development inequalities/the east lagging behind (infrastructure and training)

Insufficient research and development

Shortage of skilled labour and high long-term unemployment

RISK ASSESSMENT

Growth strengthens further

Growth is expected to peak in 2019. Household consumption remains the main driving force of the economy thanks to solid real wage increases and growing employment. In the first half of 2018, the unemployment rate dropped to 6.9% – a record low for Slovakia. Despite improvements in this regard, especially when compared with much higher unemployment in 2013, there are still strong regional differences between the East and the West of Slovakia: the latter (including the capital city of Bratislava) enjoys a strong concentration of foreign and domestic companies that makes unemployment much lower. Despite those regional differences, labour shortages have been sharply increasing in Slovakia, especially in manufacturing. A lack of adequate labour force has been pushing wages upwards over recent years, with real wages increasing by 3.8% in the first half of 2018 alone and the average monthly gross wage exceeding €1,000 for the first time ever. The minimum wage rose by €40 to €520 in January 2019, while state salaries went up by 10% in January 2019, and again in January 2020.

In addition to household consumption, GDP growth remains enhanced by fixed asset investments, which are estimated to have surged by double-digit dynamics in 2018. The construction of the Jaguar Land Rover plant strongly contributed to this increase. The factory starting operations in October 2018, and plans to increase the number of employees to 2,800 and the annual number of produced cars to 300,000. As a result, the plant has reaffirmed the automotive sector as the main manufacturing industry in Slovakia. Public sector investment projects have also accelerated – although the Bratislava ring road has been delayed, and it is probable that the deadline for its completion in 2020 will not be met.

Satisfactory public and external accounts

The government deficit dropped to 0.8% of GDP in 2017 and initial estimates indicate that it remained at this level throughout 2018. Although the fiscal consolidation is on track, increased government consumption and investments made ahead of the November 2018 municipal elections prevented the government from decreasing the deficit further. However, the deficit remains on a comfortable level, and is expected to contract further to 0.4% in 2019. The favourable macro–economic situation has led to increased revenues from personal and corporate income taxes; and improved tax collection has also been a positive factor for the budget situation. Public debt is expected to remain below 50% of GDP in the foreseeable future.

The current account balance is supported by growing exports. New investments are increasing export capacities (exports of goods and services already exceeded 98% of GDP at the end of first half of 2018), with the Jaguar Land Rover factory in particular accelerating export growth, despite concerns regarding the sustainability of global demand. The services balance is also positive, but deficits of primary and secondary income made the current account negative in the first half of 2018. Interest and dividend repatriation, a consequence of the strong presence of foreign investors (especially in the automotive sector), is likely to be only partially offset by remittances from Slovak emigrants.

Government remains stable

After the March 2016 elections, then-Prime Minister Robert Fico and his centre-left party, Smer-SD (European Socialist Party member), lost their absolute majority in parliament and had to form an alliance with the conservative National Party and the centre-right Most (Bridge) Party. Following the murder of an investigative journalist in February 2018, Mr Fico, as well as the Minister of the Interior and the President of Police, resigned to prevent early elections demanded by coalition partners. In March 2018 Smer-SD chose Peter Pellegrini, a Deputy Prime Minister, to replace Robert Fico. Support for Smer-SD has stabilised since the scandal surrounding the murder. At the time, opinion polls indicated that the party had lost around a fifth of its supporters, and that it retained the support of just over 20% of voters. Indeed, the November 2018 municipal elections were won by independents, with the Smer-SD party failing to gain any mayoral seats in any regional capital. More specifically, independent mayoral candidates gained the most support (42.4% of total votes), followed by Smer-SD candidates (20.4%) and the Slovak National Party(5.5%).